There is a good reason why markets have been unconvinced by the latest Eurozone intervention: policymakers continue to deal with symptoms while structural problems mount up. This is now the third summer in which investors have seen returns hit by a deepening euro crisis. Each time has resulted (eventually) in credible responses from Brussels. But it is no longer enough for the European Central Bank to be granted greater firepower, or the bailout fund to be thrown more resources. If the euro is to survive, Europe must tackle the structural problems of a monetary system which lacks fiscal coordination. There has been movement (especially in Berlin) in recent months, as the dawning acceptance that common debt is necessary. But democratic politics is slow and markets are very fast. The longer it has been left to fester, the bigger the dose of medication required.
Stephen Barber is reader in public policy at London South Bank University and economic adviser to Selftrade, the stockbroker.
Market reaction says it all – Spain will soon require a national bailout on top of the €100bn (£77.9bn) already given to its banks. Common-sense now dictates that either the Eurozone should jettison its weaker members or adopt full fiscal integration in order to survive. However, while the benefits to the EU periphery of such integration are clear, this course of action would be disasterous to the reigning champion – Germany. Over one third of German national output is exported. It doesn’t take a huge leap of faith to understand that a resultant jump in borrowing costs, coupled with a appreciation in the value of the euro caused by fiscal integration, would cripple this key element in the German economy. While full Eurozone integration would represent a viable solution to the needs of the many, it’s difficult to envisage a scenario where a German premier would ratify a “solution” that destroys the country’s ability to dominate the race.
Jason Gaywood is a director at HiFX, the currency specialist.